There is no substitute for open discussion amongst all members of a farming family to get straight intentions and plans for who will own and deal with farm assets when the head of the family dies.
James Spreckley, partner at law firm Lodders and head of its specialist team for the Rural Sector, explains.
There are plenty of legal cases which evidence the pitfalls and risks that come from farming families not communicating and recording clearly their intentions about how and by whom farm assets are owned or dealt with on death.
Establishing a succession plan, and the use of a well-drawn up partnership agreement, can really help head-off these sorts of disputes, help secure tax benefits and, most importantly, keep the farming assets together.
A recent case in particular highlights this.
Case study example: Why succession planning is key
This involved two generations of the same family and arguments about the farm property.
The farm was owned ‘on paper’ by the father, and after his death, a dispute arose, involving his two sons and their mother, which reached the High Court.
The farm had been run as a family farming partnership at different times involving the father and his wife and their sons. On the father’s death, he had left the farm to his widow, but when one of the sons/brothers sought to dissolve the farm partnership, the question arose as to whether the farmland, farmhouse and a bungalow were part of the partnership assets.
Had they been, then these would have been shared between the partners rather than belonging to the widow. There had been a farming partnership through which the farming business had been run, but which was being dissolved by agreement when the father had died.
The dispute concerned whether the farm, farmhouse and bungalow were assets of the farming partnership, as argued by one of the brothers, which if successful, would have entitled him and the other brother to a share of those assets.
As there was no written partnership agreement to clearly record what was or wasn’t in the partnership, the Court had to look at the evidence of the father’s intentions when he first went into partnership, initially with the older son in 1978, when he was 16 at the time.
Although the property was referred to in the partnership accounts, the family could not agree whether it was an asset, and with the father having died and his wife being very unwell, there was little personal evidence of what had been intended at the time. Not being a partnership asset was significant, as essentially it meant the farm and other properties formed part of the father’s estate and could be left under the terms of his will.
There are often good reasons why landowners will want property to be a partnership asset. It could be to ensure it is clearly business property and therefore more likely to be eligible for business property relief and in turn, to reduce potential liability to inheritance tax. Or it could be to provide stability for the farming business on the death of the property owning partner if the remaining partners have a right, in effect, to buy the assets from the estate, sometimes paying for it over a number of years.
The flip side of this, though, is that by making a property a partnership asset, the owner of the land loses the ability to deal with it as they see fit and, in particular, to leave it under the terms of their will, since they will in effect be holding it on trust for the partners.
High Court ruling
In this case, the High Court ruled that the mention of the property in the farm accounts was insufficient to demonstrate a clear intention by the late father that it should be a partnership asset. The Court made the point that property can only become partnership property by agreement between the partners, rather than by one partner merely deciding it should. In 1978, when the partnership commenced, the elder son was only 16, and the Court felt that it was unlikely his father would have intended to lose control of the farm at that stage.
As such, and as the Court highlighted, on the father’s death, the property passed under his will to his widow to whom it then belonged, so, on dissolution, whilst other business assets were to be shared by the partners, the property was not.